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Monday, July 30, 2012

What’s Up Doc?

According to Wikipedia, Kabuki is a classical Japanese dance-drama known for the stylization of its plot and for the elaborate make-up worn by the key performers. This definition also seems to fit the drama in an unknown number of acts currently being acted out on the European stage by some of the continent’s leading central bank players perfectly.

It all started last Thursday when, as surely everyone but my blind and deaf uncle must now know, Mario Draghi made what is widely though to have been an important speech. We will do whatever it takes, as long as it is in the mandate, he is reported as saying. And since stopping anything which could be life-threatening to the Euro dead in its tracks forms part of the bank's mandate under any conceivable interpretation, the ECB now have the widest possible brief within which to circumscribe its actions. The only limitation is that it should be enough, just enough, and no more. As Mario Draghi said, “believe me, it will be enough”.

But then on Friday the Bundesbank dark clouds started to loom on the horizon as the Bundesbank appeared to wade into the fray, making a statement which on first reading  seems to have been intended to say “now just hold on a minute there!” As the Irish Independent put it in a headline “The Bundesbank Pushes Against ECB’s Draghi Attempt To Save The Eurozone".

Yikes! That sounds dangerous. Someone wants to save the Euro, and with it the entire planet, and someone else wants to stop him. Assuming we are not in James Bond territory here, how can that be?

Well, that’s why I say "seem", since digging into the situation a bit, I found it very hard to identify an original source for the statements that were being attributed to that most venerable of German institutions. Certainly there was no trace of anything on the central bank website. If this was a real counter offensive, you would at least expect to see some evidence for it hanging from the bank battelements.

Well, as Ludwig Wittgenstein used to say, when you seem to hit bedrock, and even if the blade is a bit bent, don’t let your spade be turned. Just keep on digging. So I did.

What I found was a Reuters correspondent who claimed to have been told by a bank spokesman that "The Bundesbank regards central bank purchases of sovereign debt as monetary financing of governments, from which the ECB is prohibited by European law”. "The mechanism of bond purchases is problematic”, the spokesman apparently said, “because it sets the wrong incentives." On the other hand the possibility of the EFSF bailout buying government bonds was viewed as "as less problematic".

But then I moved on to Dow Jones News Wires, where I got the weird feeling their journalist had had exactly the same conversation. "Germany’s central bank remains opposed to further government bond purchases by the European Central Bank, but isn’t against using the euro-zone’s temporary rescue fund doing so to drive down soaring sovereign borrowing costs”, a Bundesbank spokesman was said to have told their reporter. Odd, I though that two separate journalists had rung up the bank independently only to have had exactly the same conversation.

In order to try and clarify matters – remember markets next week have to decide what the next chapter in the Euro Debt Crisis is going to be, so it isn’t simply pedantic to want to get this one right - I did what every well trained economist does in cases of an emergency - I went back to the original story that caught my eye in the Financial Times, where to my horror I was unable to find any mention of any conversation - imaginary or real - with a bank spokesman. The FT simply informed the world that "The Bundesbank says....." an assertion that was followed by a wording not that different to the ones to be found in Reuters and Dow Jones Newswires. Then I went to the Daily Telegraph, and found they followed the FT in simply asserting that "the Bundesbank says bla bla bla....."

But where does it say it, and who is saying it? If it is a statement of bank policy why is it not on the website, and if it is the personal opinion of say Jens Weidmann or another top official why is this not made plain?

Why does this matter? Well, maybe this IS being pedantic, but I don’t think we should start accepting that the Bundesbank (or anyone else) thinks something or other simply because the FT says they do, much as I love the paper and its charming corps of staff. Even if we are told “an anonymous source from the Bundesbank who under no circumstances wanted to be identified publically” said x, this can help us evaluate the significance of x. If we are told nothing, then frankly I for one don’t know where to start.

This is a moment when what is needed is absolute clarity about how the Euro Area is going to make the institutional changes that are so badly needed to save the common currency, and this is just what we aren't getting. And I am not the only one who was having diddiculty understanding just what the Bundesbank "intervention" was about. As Martin Essex put it in the WSJ blog:"Did Draghi Not Check With the Bundesbank? "
Could it really be that before European Central Bank president Mario Draghi raised hopes of determined ECB action to lower Spanish and Italian bond yields he failed to check with the Bundesbank? Or do they simply agree to disagree? It wasn’t Mr Draghi’s pledge in a speech on Thursday to do “whatever it takes” that was important. That’s been said before. It was his comment that high Spanish and Italian borrowing costs “hamper the functioning of the monetary policy transmission channel” and therefore come within the ECB’s mandate that boosted the markets, leading to predictions that the ECB will reactivate its Securities Markets Program of bond buying next week.
Thankfully, Bloomberg finally came to my rescue. They owned up to what had actually happened:
"A spokesman for the Frankfurt-based central bank said in a statement read over the phone earlier today that there haven’t been any changes in its position on bond purchases”.
So there we have it, a case of sex (or rather policymaking) over the phone. What journalists were presenting us with was an official Bundesbank statement. In that sense the FT were right, even if they didn't explain why they were right.

Having understood that (which was the hard part) I then spent the rest of the weekend wondering what it might mean. Could the ECB and the Bundesbank really regard it as desireable at this delicate moment to have such a public disagreement? Noting the impact Mario Draghi's statement was having on market confidence, would they really have wanted to undermine his authority. Or was there something more subtle going on?

Looking through the evidence I have come to the conclusion that it was a case of the latter. But it was a close call, and there's no ruling out the possibility that tomorrow we will be given new, additional information which forces me to change my mind.

My reading of the Bundesbank statement (crickey, this is almost becoming theological, or better put "Kremlinological", isn't it?) is that it constitutes a  delineation of what can, and what can't happen next. In this sense it could even be read as being helpful to Mario Draghi. One solution which is actively being anticipated by the markets - giving a banking licence to the ESM - is described as "prohibited" the Reuters quotes, and is thus ruled out.
"A banking licence for the bailout fund would factually mean state financing via the printing press and would be a fatal route, which therefore is prohibited by the EU treaty," a Bundesbank spokesman said, narrowing the ECB's policy options.
Buying bonds in the secondary market, on the other hand, although not actively welcomed by the Bundesbank is simply termed "problematic" and "not the most sensible way" while using the EFSF to buy in the primary markets is very straightforwardly "unproblematic". Now, since the Bundesbank understands very well that Mr Draghi needs to do something, this looks very much like a road map to me - a dose of probematic, but not prohibited, SMP in secondary markets and backing full use of EFSF firepower (such as it is)  in the primary ones.

Adding to the scenification we have a visit by Mario Draghi to Frankfurt this morning, in an attempt to "convince" Bundesbank representatives of the need for action on the part of the central bank. Kabuki theatre in its purest form.

Which brings us to that Le Monde story that was going the rounds last Friday. The newspaper, again citing unnamed - although not evidently Bundesbank - sources, said the ECB was willing to take part in a combined action, but on condition that governments agreed to tap the bailout funds, the European Financial Stability Facility and the European Stability Mechanism.

So here's the key - the countries involved (Spain and Italy) have to request help, and this means conditionality. It wouldn't be a full bailout, the countries wouldn't be taken completely out of the market (commercial banks in Spain and Italy would still be able to go on earning "carry" to help them recapitalise), and the IMF (at this point) wouldn't be involved, but there would be strings attached, and this is important not only for the Bundesbank, but for the entire ECB governing council.

So there we have it. Now it's over to you Mariano. You have to ask for help. And just in case you aren't in any hurry, there are always those kindly market participant types just waiting round outside the gate to act as herdsmen, and cajole you into the corral. But in this case the blows which will rein down upon your financial system will be all too real, and not the stylised replica of them to be found in that Japanese dance drama.

This post first appeared on my Roubini Global Economonitor Blog "Don't Shoot The Messenger".

Saturday, July 14, 2012

Portugal - Please Switch The Lights Off When You Leave!

The recent decision by the Portuguese constitutional court to unwind public sector salary cuts included by the government in its austerity measures has once more given rise to speculation  the country may not meet it's 4.5% deficit target for 2012. The court  - which ruled the non-payment of the two traditional Christmas and Summer salary payments  for the years 2012 through 2014 was unconstitutional -  took the view that since the measure did not also apply to the private sector, it was discriminatory. Whatever view we may take on how the Portuguese Constitution defines "discrimination" the important detail to note is that  the decision will not apply to 2012, and will hence only have the impact of forcing the government to find additional adjustments for 2013 and 2014, or at least a new formulation which allows them to constitutionally cut public sector pay.

Nonetheless, despite the fact it will  not affect this years fiscal effort the coincidence of the timing of the court decision with the appearance of a report from the parliamentary commission responsible for monitoring the execution of this years budget only served to heighten nervousness about the possibility that, with unemployment rising more sharply than anticipated and the economic recession still accelerating, this years deficit numbers may not add up as planned.

The country is facing a deep ongoing recession with a contraction of the order of 3.5% expected  this year, and the outlook for the second half of the year is no shaping up as though it may well be tougher than the first half. In addition, with the European sovereign debt crisis threatening to cast its long shadow right across next year, it looks increasingly unlikely that the country will be able to go back to the bond markets in September 2013 as planned. So September may well be a good month to make some needed revisions to the existing IMF programme.

Portugal is making progress in reducing its fiscal deficit, even if it may fail to precisely meet this years target. But it is not making sufficient progress in reducing external imbalances, and in achieving international competitiveness. As a result sustainable economic growth and stable job creation still seem some years away. In the meantime young educated Portuguese are increasingly upping and leaving the country in the search for a better life elsewhere. This negative dynamic needs to be broken, and Troika representatives instead of repeating the same old policy errors need to take a fresh look, and with an open mind, at the situation.

Otherwise Portugal may find itself in the invidious position of complying with most of its immediate programme objectives while leaving the road to sustainable debt and growth levels may fraught - as the IMF itself notes in its April programme review - with almost insurmountable difficulty, thus putting the long term future of the country in doubt. This post - which is a revised and expanded is version of a presentation I recently gave in Brussels - will examine the challenges - both demographic and economic - the country faces in the longer term. You can find the original presentation on Slide Share.

So Here’s The Problem

Over the past ten years the Portuguese economy has been virtually stationery. The problem is not, note, simply a Euro one, since the decline started in the mid 1990s, and has never been reversed. Here’s another way of looking at the same issue. Portuguese GDP rose rapidly in the 1990s, and then much more slowly in the first decade of the 21st century.

So now we know that the issue is not hard to define, the only difficulty facing policy makers is finding the way to do something  about it. Under standard economic theory, once a country falls into recession the "hidden hand" adjustment mechanisms will, one day sooner or one day later, serve to drag the country back out of it again (unless, naturally, the economy is caught in one of those darned liquidity traps). But for the countries inside the Euro the normal automatic adjustment mechanisms aren't operative, since one of the links in the chain - the devaluation one - has been (intentionally) broken. So as we can see, countries can get "stuck", and aspects of the situation can become "self perpetuating" - and this is the danger that Portugal faces.

Ageing Society With Growing Debt

Portugal's problem is as much about debt as it is about growth. During the Euro years the levels of both the public and the private sector debt grew substantially - which means it has the worst of all worlds.

In addition, the country had private sector debt (including securities as well as bank lending) to the tune of 249% of GDP at the end of 2011 according to Eurostat data. Add this to the 106% of gross government debt and you get a total debt to GDP ratio of around  355%. Without growth this is clearly not sustainable. In fact what is incredible is how the country was able to accumulate so much debt without the accompanying economic growth. The bang per buck was, frankly, terrible.

And it isn't just any old debt. A lot of it has been financed through the European interbank market, meaning a massive external debt has been run up, and used to finance all those imports and current account deficits. Portugal's net international investment position showed a debt of over 100% of GDP at the end of 2011.

Now of course the moment of truth has come, and it is time to start paying it all back. Which means that living standards which were being maintained by borrowing to buy imports will fall since the borrowing stops, but they will also fall due to the need to now pay the borrowed sums steadily back.

So, far from Euro membership being an unmitigated success for Portugal, the country has seen a serious lack of growth in living standards and even a loss of relative position in the “Euro league” If we look at the graph below - which shows per capita GDP in both Portugal and Slovenia as a percentage of the EU average - we can see that while living standards in Slovenia rose steadily during the first decade of this century, in Portugal they were more or less stationary (in relative terms). Yet as we know, Portugal is a comparatively poor country in EU terms, and should have benefited much, much more. Now Portugal's relative position is even likely to fall.

The thing I often say about the monetary union is that it is a structure which offered every facility to a country which wants to get into trouble (cheap borrowing, enhanced credit rating, very low sovereign debt spreads) but which makes it much more difficult to correct the problems once they have built up. Portugal's tragedy is that it got into trouble just before it joined, and the Euro only added to the countries problems rather than offering a framework which made it possible to sort them out. How ironic that the one country unable to advance unaided the  reform and growth programme that became know as the Lisbon Agenda should be Portugal. The real "Lisbon" agenda was evidently something else entirely.

Some Unique Portuguese Features

The curious thing about Portugal is how its trajectory towards first full EU and later EMU membership shows more resemblance to the path which was later trod by a number of East European societies than it does to that of its South European peers.

In what was to be a harbinger of events elsewhere a decade or so later, the country systematically lost population during the EU “coupling” years, as workers left in droves in search of higher wages elsewhere. The phenomenon has left a lasting scar on both the economy and the society. Little surprise that the country which was once a prototypical  "emigration society" should so rapidly have become one again under the impact of the current crisis.

Naturally Portugal, like all European societies, is ageing quite rapidly, a process which won't be helped any by the significant numbers of young people who are now leaving.

And the main reason for this societal ageing process is, of course, long term very low fertility. I've said it before, and I'll say it again, it makes absolutely no economic sense for a society with long term fertility well below replacement rate to become a net exporter of labour. In the long run the economy of such a country cannot be sustainable, and I'm surprised the IMF haven't noticed this yet.

Under The Tutelage of the Troika

Portugal was the third Euro Area country to succumb to the pressures of the financial markets, and bolt for safe harbour in the form of an EU/IMF rescue programme. As a result the country has now received an initial 78 billion euro bailout in return for which it is implementing a strict deficit correction programme. Even if one might want to quibble about some of the details, the country has implemented most of what was asked of it.

And as a result the Troika has consistently given Portugal what can only be called "glowing reports" - which compared to the ones Greece receives they certainly are.

And along with the deficit even the bond yields are coming down. Yields hit a spike back in February as markets worried about the second Greek bailout, with its debt restructuring component, and asked themselves the question - will Portugal be next?

So Where Are The Problems?

Well, so much for the good news. Despite the high level of programme performance, the country still faces severe "challenges" since implementing reforms and austerity is one thing and achieving growth and reducing debt quite another. Not unsurprisingly, the economy is now in deep recession. The IMF expect the economy to contract by 3.3% in 2012, and return to timid growth in 2013 (0.3%). But as the fund themselves recognise, there  are strong downside risks to the 2013 forecast, and it is not improbable the economy will once more contract.

Equally worryingly, unemployment has now started rising sharply, raising questions about a "Greek turn" in events. Apart from the social distress caused this surge in unemployment is having two consequences. The original deficit targets will not now be met, even with this years public sector pay cut, and the young and educated are leaving the national ship in increasing numbers.

As the IMF says in its April programme review the country is conducting a large macro economic adjustment with only a "constrained toolbox" available  (a euphemism I presume for the inability to devalue).

The IMF report was, incidentally, quite frank and realistic about the problems the country faces, unusually so, and far more explicit about the issues than the Romania one I reviewed last week. On the one hand they state "competitiveness indicators are showing some signs of improvement with wages declining in some sectors and a sizeable improvement in the current account deficit in 2011".... yet...."Despite this progress,formidable challenges remain...the simultaneous pursuit of fiscal austerity, structural reforms, and the deleveraging of the economy—objectives that can work at cross purposes—increases the risk that the program’s objective of rapidly reducing macroeconomic imbalances remains out of reach in the near term".

What macroeconomic are we talking about here? Well, in the first place, despite the above-mentioned improvements the country still runs a goods trade deficit.

And while the current account deficit has been substantially reduced, the IMF are still forecasting a 4% of GDP one for 2012. More tellingly, they see the country as being unable to reduce the deficit below 3% of GDP before 2018. To really start to get sustainable export-driven growth and ongoing debt reduction (what the IMF call "external stability") we will need to see, remember, the current account move into surplus, and stay there. So are we facing a case of the low hanging fruit now having been picked? In any event, and taking the IMF warnings to heart, it doesn't seem unrealistic to suppose that Portugal will need some sort of support for its correction throughout the rest of this decade. That is what having a "constrained toolbox" means.

Portugal's post 2009 export recovery has been strong.

But as with most other economies on the periphery the slowdown in European and Emerging Market growth is making this improvement in export performance hard to sustain. Indeed the rate of export growth has been slowing, and has now fallen into negative territory on an interannual basis.

Obviously Portuguese exports will pick up again once global growth starts to recover, but by just how much can they pick-up without a much larger change in relative prices? As part of its third  programme review the IMF carried out a competitiveness study as a result of which the Fund estimated the competitiveness gap at some "13–14 percent as of 2010", noting in passing that "the gap has to date only narrowed marginally (by about 1 percentage points)".

Using an external stability approach 8one which focuses on reducing the net International Investment Position - IIP) they also found that "to halve Portugal’s highly negative IIP (to about -52 percent of GDP), a real exchange rate depreciation of about 13 percent would be needed". Both ways of looking at the issue seem to give a similar result - that around a 13% improvement in competitiveness is needed - and given that they also found that "since peaking in 2009, the adjustment in unit labor costs has been fairly limited. In particular, as of Q3 2011, ULC-based real effective exchange rates are only 2–3 percent below their 2009 peaks" it is clear there is still a very, very long way to go.

Banking  and Financial Sector

Portugals banks continue to be dependent on the ECB for liquidity. Borrowing hit a new record of 60.5 billion Euros in June, up 3% from May.

At the same time the flow of credit to the private sector remains constrained. Bank lending to the private sector was down about 4.5% from a year earlier in May according to Bank of Portugal data.

Also bad loans are rising, and especially in the construction sector. Bad debt owed by Portuguese households and companies rose a further eight percent in April to reach almost €14 billion according to bank of Portugal data. This was an increase of  €2 billion since the start of the year. The majority of this, around  €9 billion, is corporate debt, but there has surely been a good deal of "evergreening" going on, and the total exposure of Portuguese banks to souring loans - in particular builder and developer ones - is undoubtedly much larger.

Construction  Slump Threatens Bank Balance Sheets and Employment

Portugal did not have a housing boom like Spain or Ireland, nonetheless with a strong tourist industry construction has played an important role in the economy in recent years, constitution something like 18% of total GDP in turnover terms. According to Manuel Reis Campos, head of the Portuguese Construction and Real Estate Confederation, the sector, which is the country's largest employer, faces rampant unemployment and bankruptcies that threaten the repayment of 38 billion euros in debt to the banking sector as the credit crunch and austerity bite.

"The (construction) sector owes 38 billion euros to the banks, bad loans have gone up sharply, much more than expected, along with bankruptcies. We expect 13,000 companies to go bust this year and the sector to lose 140,000 jobs," Reis told foreign correspondents at a briefing. "The sector has no work, the banks don't finance us and the state does not pay. It is a disaster," Reis said.

Reis predicts the country will follow Greece and Spain into the 20% plus unemployment bracket by the end of  this year if things don't change - government forecasts have unemployment rising to 15.5% this year from last year's 14% and to 16% in 2013. Unemployment was at a seasonally adjusted 15.2% in May according to the latest Eurostat data. Construction and real estate employed 670,000 workers in Portugal in 2011, compared with 830,000 in 2008.

According to the Royal Institute of Chartered Surveyors European Housing Review 2012 Portugal has seen a drop of 71% in annual housing starts since the initiation of the crisis.

As they say, this puts the country just behind Spain, Ireland and Greece in the construction slump league.

House price increases were modest, as have been the more recent declines:

But the slump in construction activity has been dramatic.

Conclusions - What Happens Next?

The First Consequence - A Second Bailout Looks Very Likely

Portugal is scheduled to return to the bond markets next year. Given the outlook for the sovereign debt crisis this seems unlikely to be possible. In addition January's Standard and Poor's decision to downgrade the country (from BBB- to BB), means that its debt is now rated sub-investment grade (aka "junk" status) by all three main credit rating agencies. In practical terms downgrade led to a reduction in the country's potential investor base, since many investment and money market funds are now unable to hold Portuguese debt, while resident financial institutions can't possibly assume responsibility alone.

On the other hand markets have pulled back from their aggresive stance of earlier this year, and bond yields have fallen substantially. One conclusion which could reasonably be drawn here is that they are now not pricing in Private Sector Involvement (PSI) in any kind of debt restructuring in any forthcoming programme revision during the foreseeable future. And this seems perfectly realistic since Portuguese PSI is most unlikely at this point. What is more probable is a restructuring of the size and term (and possibly interest cost) of the current official sector loans, together with some relaxation in deficit targets in tune with the EU's new "modified austerity" stance.

Estimates of the size of the second bailout vary. More than likely we are talking about something in the region of 50 billion euros 24.2 billion for financing in 2013/14, plus another 26.9 billion euros for 2015. And then something to allow for the worsening economic scenario and the relaxed deficit conditions.

But whatever happens in September, in the longer run the future of Portuguese debt looks very precarious, since it is delicately balanced on a knife edge, and could easily veer sharply upwards under an unfavourable scenario. So PSI in the longer term is far from ruled out.

As the IMF says in its third programme review, "if growth disappoints, interest rates are higher, or the fiscal effort less than envisaged under the program, the debt dynamics would be less forgiving—leading to a debt-GDP ratio that would remain well above 100 percent for the foreseeable future. And the adverse combination of low growth, higher interest rate and a lower primary balance would place debt on an unsustainable trajectory".

They also stress the danger that private sector debt may need - Spanish style - to be bailed out: "The scenarios also show that there would be little scope to accommodate the migration of private sector liabilities to the public sector balance sheet". Think of Mr Campos mentioned above, of Portuguese builders and developers, and of what may be happening to bank balance sheets even as I write.

Or think of the significant number of effectively state owned enterprises that are still officially classified as private sector. According to IMF estimates, explicit guarantees to SOEs (including those outside general government accounts) represented between 10% and 15% of GDP in mid-2011.

According to the Troika’s central case scenario, Portuguese debt will increase from 107.2% of GDP in 2011 to 116.3 % of GDP in 2012 and peak at 118.1% in 2013. Debt sustainability is expected to be confirmed from 2014, when the debt-to GDP ratio is expected to decline to 115.8%. The Troika assumes that Portuguese GDP falls by 3.0% in 2012 followed by a mild recovery (0.7%) in 2013 and a pick-up in growth to 2.4% in 2014. Thereafter, the Troika assumes real GDP growth of 2.0% per year and nominal GDP growth of 4%. As the Troika expects that Portugal will return to market funding in 2013, it estimates the average interest rate for new debt of around 4.8% for the period up to and including 2015.

Back in February a team of Citi researchers lead by Jürgen Michels examined a number of scenarios for GDP growth spanning the 2012-16 period around the Troika’s baseline (see chart above). To give an idea of just how sensitive the Portuguese debt path is to the economic growth parameter, they found that in the event of GDP growth undershooting the baseline forecast by between 1 percentage point and 3 percentage points the debt-to-GDP ratio would be on an unsustainable path, rising to 134% and 202% of GDP, respectively,by 2020.

Naturally, having higher than expected interest costs, or significant debt transfer from the private sector would have similar negative effects.

In Addition Young Educated People Are Increasingly Leaving

According to Peter Wise, writing in the Financial Times, "Portugal’s prime minister has been free with his advice to the legions of young and unemployed in his country. They should “show more effort” and “leave their comfort zone” by looking for work abroad. Teachers unable to find a job at home should think about emigrating to Angola or Brazil". The background to this controversy is, as Peter points out, the sudden emergence of Portugal as an origin country for emigration.
"In the decade after Portugal met the criteria to join the euro in 1999, emigration, which had served as an economic “escape valve” for 200 years, virtually came to a standstill. For the first time in its history, Portugal was a net importer of migrants. But with an estimated 120,000-150,000 people leaving a country of 10m last year, emigration has now surged back to the peak levels of the 1960s and 1970s, when waves of impoverished workers departed for northern Europe and the Americas."
And as he emphasises, the difference between this and earlier population outflows is that, unlike the largely uneducated workforce that left in previous haemorages, many of today’s migrants are young graduates with university degrees.

The net loss of human capital is evident. The impact on population ageing is less so, but soon becomes clear when you think about what happens to the population pyramid. But what about economic growth, what does this do to the long term growth rate? Isn't a country with long term below replacement fertility effectively commiting suicide if it exports its working age population?

Economic growth attracts migrants as the labour market expands, this increases the working age population and with it the long term growth rate. On the other hand, a country which has a lasting economic contraction can loose population as unemployment rises (this is what is happening now along Europe's periphery), with the loss of population the potential growth rate falls, and with it future employment. If you aren't careful this encourages more people to leave, and the situation becomes circular (arguably this has already happened in Latvia) with low growth/recession feeding on itself. If the median age of the people leaving is lower than the median age of the workforce, or if the educational level of those leaving is above the average of the workforce, then the quality of your labour force, and with it potential productivity, falls. At the same time the debt problem becomes greater, since there are less people left to share the debt.

It gets worse, because less young people means less household formation (think of those builders with their empty houses), less new families, less children, and more health and pension unsustainability in the long term. All of this is so obvious that the only thing which surprises me is that I have found NO EVALUATION WHATEVER of this phenomenon in any of the Troika literature.

Some will say that these movements are good, since what Europe needs is more labour market flexibility. To which I would say yep, you are right, the only difficulty is we still have nation states who are expected to be self sustaining, so pension contributions are paid in one place, while the old people waiting to receive are in another. The statement by Pedro Passos Coelho reminds me of an earlier one by Mexican President Vicente Fox that he would create six million jobs. "Yeah," one witty observer said later, "what he didn't tell us was that they would all be in California."
"During President Vicente Fox's six years in office his goal was to create six million jobs across all sectors of the economy. Mr. Fox fell far short of that goal. Between 2000 and 2006, the period when he was in office, Mexico created only 1.4 million jobs. Though accurate figures are difficult to arrive at, the Government Accountability Office estimates that during each year of Mr. Fox's presidency between 400,000 and 700,000 illegal immigrants arrived in the U.S. from Mexico. The number of illegal immigrants from Mexico was roughly equal to the number of jobs Mr. Fox did not create."
Naturally, if the Euro Area was one single nation state like the United States is none of this would be a problem - but it isn't!

This post first appeared on my Roubini Global Economonitor Blog "Don't Shoot The Messenger".

Sunday, July 8, 2012

Neither Grexit, Nor Spexit, It's Fixit or Fexit

The aftermath to last weeks EU summit has certainly proved to be a damn sight more perplexing than the actual summit itself. Contrary to earlier experiences, this time round the more the details have been "clarified" the more confused we have become.

Just what exactly was approved? Will Spain's banks really obtain capital directly from the ESM, and if so, how and when? Is Spain about to get a full bailout? Is Italy? Is there a commitment to bringing down sovereign borrowing costs. And just to top it all of what about Greece, what is the next move, is there any kind of plan?

Little wonder then that Spain's 10 year bond yields were once more back over 7% on Friday. Markets had taken the view that while agreement on the details of an ESM bond buying formula and full banking union would obviously take time, surely the ECB would be prepared to do something - another LTRO, reopen the Security Markets Programme - in the meantime. But no, Mario (Draghi this time) was not for turning, and sent the ball straight back into the politicians court.

Really I think the markets have gotten a bit ahead of themselves here in expecting instant action, since European decision making works according to its own timeless laws. To reach my conclusions before I draw them, I think it is plain that Spain's bank recapitalisation will be, kicking and screaming, an all Euro Group affair. That is to say the debt sharing the Finnish Finance Minister so desparately fears will take place, even if we take a while to get there. And Spanish and Italian bonds will be bought, even if we need to take a quick look down into the abyss just one more time first. But these measures alone won't save the Euro, only getting the periphery back to growth can do that, and at the moment the suggestion box seems to be empty on that count. Structural reforms alone will work neither far enough nor fast enough.

Root Of The Problem

But if the markets have gotten ahead of themselves in their enthusiasm there are reasons for this. So first a bit of background.

The root of the problem here goes back to the G20 summit in Los Cabos, Mexico, where an outnumbered Angela Merkel came under general pressure to accept an idea from the other Mario (Monti) to let the bailout funds (ESM, EFSF) buy Spanish and Italian government bonds to bring down borrowing costs. After the meeting the impression was given that Germany had acceded to the pressure and commited itself to the idea of "driving down borrowing costs across the single currency area", indeed the FTs Chris Giles and George Parker even asserted this phrasing to have been in the communiqué:

"Eurozone members of the group of G20 leading economies have committed to driving down borrowing costs across the single currency area, according to the communiqué from the summit in Mexico".

Reading through the text though, it rather looks as if they had been "had". There is no such mention, and the key reference sentence simply states,
"Euro Area members of the G20 will take all necessary measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks".

More anodyne unimaginable. To add insult to injury, further down the body of the text it says:
"The adoption of the Fiscal Compact and its ongoing implementation, together with growth-enhancing policies and structural reform and financial stability measures, are important steps towards greater fiscal and economic integration that lead to sustainable borrowing costs"
Which is more or less pure Merkelese. So we shouldn't say we weren't warned.

Once Bitten Twice Shy?

Obviously, given the way leaked commitments suddenly disappeared in the concluding statement, we should have been prepared for the possibility that decisions which appear in a concluding statement may later disappear in the mists of clarification. We weren't, even though we should have been more on our guard the second time around.

Now according to the official version of what happened in Brussels a coalition of "Latin" states, lead by Mario Monti and Mariano Rajoy steamrollered the Angela Merkel into accepting policy measures which they had been pressing for. Der Spiegel put it thus:

"Italy and Spain were able to secure immediate measures to lower their borrowing costs at the European Union summit in Brussels on Thursday night. The agreement allows direct EU bailout aid to struggling banks, which Chancellor Angela Merkel had opposed".

Further, according to the statement issued after the summit, the meeting agreed that the ESM would be able to recapitalise Spain's banks directly.
We affirm that it is imperative to break the vicious circle between banks and sovereigns. …. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly.
The measure was seen as an important one, with implications for other member states, as witnessed by the reference to Ireland that was included.
"The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally".

So the clear implication was that Spains banks would be recapitalised directly, and that this would be done in such a way as to break the link between banks and sovereigns, and that while it was recognised there would need to be some kind of bridging measure - the statement affirms that "the financial assistance will be provided by the EFSF until the ESM becomes available, and that it will then be transferred to the ESM, without gaining seniority status" - it was assumed that the money would then be retroactively assigned to the banks themselves, by-passing the sovereign. The explicit reference to Ireland allows no other reading.

Yet on Friday the earth under our feet started to move, and with it the financial market assessment of Spanish sovereign risk. Matina Stevis reported on Dow Jones Newswires a conversation with a senior(but anonymous) EU official who stressed the following point:
“I need to make clear what the ESM can do: the ESM is able–if one were to decide ever on such an instrument–to take an equity share in a bank. But only against full guarantee by the sovereign concerned,” the official said. “What you have is that it cuts out the effect of that loan on the debt-to-GDP ratio of the sovereign. Does it still remain the risk of the sovereign or [does it go to] the ESM? It remains the risk of the sovereign.”
Charles Forelle sums the situation up quite aptly on the WSJ blog, what we have here is much less of a bold step forward and rather more of a neat exercise in accounting footwork.
Many in financial markets have assumed the ESM would recapitalize banks on its own–by giving them cash or high-quality bonds in return for equity stakes (or some sort of hybrid instrument, like contingent-convertible notes) in the banks. That way, the whole of the euro zone, and not just Spain, would bear the risk of the banks’ rescue. Yes, structuring the aid as a direct recapitalization does avoid the need for Spain to incur an actual liability to the bailout fund (and pay interest on its borrowing), but requiring that Spain indemnify the fund against losses just saddles the country with a contingent liability instead of an actual one.

What matters to investors trying to assess the viability of investing in Spanish government bonds isn't what it says on the official Eurostat EDP accounting docket, but rather the actual path of total Spanish debt (including contingent liabilities, and their probability of becoming actual ones) and the sustainability of that path. Sustainability issues may arise either because the total debt becomes too high, or because growth is too low, and in the Spanish case there are concerns on both counts, and especially if the Euro Group will not share losses in the Spanish banking system.

On the other issue, that of bonds purchases, the situation is less clearcut. True the statement did hold out the possibility of purchases:
We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area, in particular by using the existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilise markets for Member States respecting their Country Specific Recommendations.

But in fact this possibility still exists, since the statement also affirms that any such use would be contingent on a prior memorandum of understanding, and a precondition for the drafting of one of these is that someone apply, and to date neither Spain nor Italy have made any such application.

So, in fact Der Spiegel was not actually being faithful to the letter of the statement when it argued the following:
The key to getting your way in tough negotiations, of course, is to find your opponents Achilles' heel. Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy did that on Thursday night and early Friday morning in Brussels. And the result is a euro-zone agreement to allow the common currency bailout funds to give direct help to ailing banks and to become active on sovereign bond markets to provide relief on the financial markets -- free of conditions for the countries in need of such aid.
Further down the article, the authors qualify the point:
In addition, emergency aid funds will in the future be made available to stabilize the bond markets without requiring countries, providing they are complying with EU budget rules, to adopt additional austerity measures.
This is the so called "virtuous countries" clause.

Something somewhere deep inside me chokes on the idea of considering Spain and Italy "virtuous" countries (in the economic sense, of course), since Spain's is surely not going to be able to reach this years deficit target of 5.3% of GDP (just as it failed to reach last years target of 6%), while Italy's gross debt looks all set to surge onwards and upwards as the country sinks deep into a recession of unknown duration. The phrase both claims too much for both of them, and too little for the other three who have already received bailouts (the non-virtuous countries, or sinners, I suppose).

Instead of being sanctimonious about this, what not be straight and up-front: Spain and Italy are large countries, with far more political clout than the others, and both Mr Monti and Mr Rajoy would be hard pressed to sell a bailout at home, in just the same way that the Euro Group would be hard pressed to fund one.

Where Do We Go From Here?

As we can see from yesterday's movement in Spanish yields, market participants have been left busily scratching their heads. Is the delay in bond purchases only temporary, or is there a more substantive problem looming? Certainly the threat by the Bavaria based CSU, sister party to Merkel's own CDU, to unseat the government, if necessary, is not reassuring. The FT reports they are far from happy with the terms of the "agreement".
"Horst Seehofer, leader of the Bavarian sister-party of Ms Merkel’s conservative Christian Democrats, warned that softening the conditions for funds would “at some point lead to the situation” in which his Christian Social Union could no longer support eurozone aid".
In addition the Finnish finance minister has now gone further, and suggested that her country might feel forced to leave the Eurozone should debt sharing - implicit in the direct bank recapitalisation - be agreed to.
"Finland is committed to being a member of the euro zone, and we think that the euro is useful for Finland," Urpilainen told financial daily Kauppalehti, adding though that "Finland will not hang itself to the euro at any cost and we are prepared for all scenarios. Collective responsibility for other countries' debt, economics and risks; this is not what we should be prepared for," she added.
Well, Roger Bootle should be pleased, he can take his shining new Wolfson trophy up there and see if he can recruit a client. In fact Finland must be one of the few cases where leaving the Euro Area might not be traumatic in its consequences, although I'm not sure how the decision would go down in neigbouring Estonia.
Our suggested exit path from the euro involves the overnight introduction of a national currency, with monetary amounts converted at 1 for 1, while the currency is allowed to fall well below this on the exchanges"
Whoops, the Finnish case wasn't contemplated - since their currency would doubtless rise, not fall - but still, it's all in a days work. Anyway, those sufficiently interested can find a simple set of rules for exit outlined in the following video.

Gamechanger or Gameover?

Yet no matter how positively or cynically we perceive what just happened, the fact of the matter is that this latest summit did produce results which, while possibly not being complete game changers, would in fact constitute a significant advance in the debt crisis if they were implemented, in particular since they do constitute steps towards that long promised banking and fiscal union. And basically, as I say at the start, even if it takes a bit of kicking and screaming first I do think they will be implemented.

Far and away the most important of these decisions was allowing the ESM to in principle fund Spain's bank recapitalisation. If followed through the decision will possibly come to be seen as a landmark one. My feeling is that the nervy events of the last week will not be the end of the matter, and that eventually a plan and timescale for setting up a banking union will be agreed on, since the costs of not doing so would obviously be far higher than those involved in so doing.

From now on at least a part of the costs of the Euro experiment's first decade will be shared by all those participating. The issue also serves to underline the fact that this crisis is not only about irresponsible fiscal policy. It is also about inadequate monetary policy and its after effects. Paying the costs of faulty decisions which were taken collectively should not only fall on the shoulders of a few - in this sense the Finns (true or otherwise) are wrong, this is not paying for others debts, it is about paying for joint and severally acquired ones. This is something I have been arguing for since 2007, so I can hardly not be pleased by this step.

The consequence is that with a "clean" implementation of the decision the entire Euro Area will now stand behind Spain'sbanks, as will Germany as part of the Euro Area, and indeed all countries in the monetary union would become become part-owners of at least some of Spain's banks. As Angela Merkel said last week, Germany can only thrive if her neighbours do, and now the German's will become stakeholders in the financial institutions of one of those very neighbours.

Markets would also be reassured by this outcome, since from that point it wouldn't really matter if the recent Oliver Wyman and Roland Berger reports gave a full and adequate reflection of the full mid-term recapitalisation needs of Spain's banks - if more money is needed there would be a mechanism in place whereby more money could be found. This is very different from having a Spanish sovereign which is teetering on the brink of being unable to finance itself having to try and guarantee a banking system which contains an unknown number of black holes. In this context it is not unreasonable to think that the Euro Area partners could eventually end up with a majority equity stake in the entire Spanish banking system, we will see. The good news is that whatever the final damage, there is now enough cement available to fill the hole, and we can stop playing around with polyfiller.

Beyond Spain - as the summit statement recognises -  the decision will also have implications for Ireland, and possibly - as I argued last week -  Slovenia (which also needs a bank recap and is starting to experience difficulty in financing itself). And in Ireland Deputy Prime Minister Eamon Gilmore is surely right, it will be a gamechanger, since Ireland's huge burden of sovereign debt would be significantly reduced as the equity holding is tranferred to the ESM.

From the Spanish point of view the counterparty here is that the government will now need to accept permanent European supervision of Spain's banks. The Bank of Spain is effectively about to become a local office of a European bank regulation system. Having seen what we have seen since 2006 this outcome can only be welcomed.

Virtuous Circle?

The second chapter included in last week's Brussels pact is much more complicated. The moral hazard problem here is going to be considerable. especially if the ESM does finally directly recapitalise Spain's banks. Once the threat of having a large sum loaded onto Spain's national debt from its troubled financial sector, Spain actually is left with a gross debt to GDP level which is below the EU average, even after all those unpaid bills have been paid. So Mr Rajoy could easily argue "where's the rush in reducing my deficit, I'm no worse than France or Germany" - German debt will, of course, have gone up due to its participation in the Spanish bank bailout. Complicated times.

So this is surely why Mario Draghi was not willing to initiate another intervention in the bond markets, and why the EFSF isn't yet buying Spanish bonds - Spain needs to reach agreement with Brussels on the measures  to go in the Memorandum of Understanding, and now Mr Rajoy is suddenly in less of a hurry than he was a week ago. Press reports suggest that Spain may need to undertake a further 30 billion euros in spending/revenue measures in exchange for an extension of the 3% budget target to 2014. This will almost certainly result in a stronger than anticipated economic contraction this year, and virtually guarantee a further sizeable one next year too. 

Italy appears to be struggling with this years targets too. Despite the fact that Mario Monti has just passed another 4.5 billion Euros in fiscal measures for this year (and a total of 26 billion Euros between now and 2014) doubts still exist the country will be able to meet its targets, largely due to the scale of the recession it has brought down on itself. Making what seem to me to be pretty reasonable assumptions, a team of Citi analysts lead by Jürgen Michels reach the conclusion that far from bringing the budget close to balance by 2014, the deficit in that year is likely to be around 3%, bringing gross government debt to GDP to the perilously high level of 137% of GDP. The IMF have it at 123% for the same year, and between these two numbers lies a chasm which if crossed will be hard for the country to work its way back across.

In addition Itay's political dynamics are now becoming particularly problematic, with elections looming next year, and many of the political parties now positioning themselves in anticipation.

So again, as in the Spanish case, the moral hazard issue looms large, as does the entire credibility of the programmes put in place so far. It's hard to make a strong claim they are actually working.

And even were the will to bail out both Spain and Italy there, it still isn't clear what the way is.

Allowing the ESM intervene by buying bonds raises the obvious issue that its notional €500 billion firepower would  be quickly used up. In addition calls on the fund are only likely to grow in coming months. Following the lead of  Cyprus last week, Slovenia is now more than likely waiting in the wings (see here). And before the year is out, a second programme for Portugal and a primary market support facility for Ireland are also likely to be  necessary.

Portugal risks missing this years deficit targets, partly due to a fall in revenue, and partly due to increased spending as a result of a strong surge in unemployment.

And as if all this wasn't enough, Portugal's constitutional court ruled last Thursday that the a government decision to withdraw public-sector workers' traditional additional two months salary payents between 2012-14 was unconstitutional, thus piling on the pressure on Prime Minister Pedro Passos Coelho to seek looser conditions for its bailout program.

The likely date for the second Portuguese bailout is September, following the rationale for the Greek one, since Portugal is programmed to return to the markets to finance bonds in September 2013 (an outcome which is extremely improbable), and the IMF has a “financing guaranteed 12 months ahead” rule. More than likely the country will need something over 50 billion euros - 24.2 billion for bond financing  in 2013/14, plus another 26.9 billion euros for 2015. Then there will need to be something to allow for the worsening economic scenario and the relaxed deficit conditions.

The Irish case is rather different, since the country has been promised a review of its programme in the light of the decision to give direct aid to Spain's banks. Bank recapitalisation has so far cost Ireland a total of €62.8 billion, or 40.7% of annual GDP, according to IMF data. Ireland's was the seventh most expensive bank recapitalization (as a share of GDP) on record and by the far the most expensive in recent history among the EU15 countries (with Finland’s early 1990s one coming second, at 12.8% of annual GDP). It is not clear at this point what kind of flexibility will now be shown to Ireland. A "low cost" option would be to allow the ESM to replace the 30.6 billion euros in promissory notes issued to recap the IBRC. Doing this would cut Ireland’s government debt/GDP ratio (which was 108.2% in 2011) by about 20% of GDP, and also cut future deficits by about 1% of GDP. The "business class" option would be to take all of Ireland’s bank recapitalization costs onto the ESM, which would cut Ireland’s government debt/GDP ratio by about 40% (and, of course, at the same time reduce the future deficit path). The most likely outcome is the low cost one, but still the impact on Ireland's debt sustainability would be important. The Irish government has said it is seeking a decision by end-October, to have more certainty over future funding needs as the existing bailout nears its planned completion at end-2013.

Which brings us to Greece. Ah, Greece! Well the government has admitted that the country is no longer "on track" to meet its programme' fiscal objectives.

The country has also stated publicly that it does not want to renegotiate the Memorandum of Understanding.

And the "men in black" from the Troika are now back in town.

So we look all set for a new set of deficit targets to be agreed, along with a hefty injection of European structural funds and EIDB money. As I suggested here, everyone now will have done their sums, and seen just how expensive it would be for Greece to leave (not to mention the contagion risks) so the current priority must be to find ways of keeping the country in.

Naturally stretching the austerity targets for Greece will also require fresh cash, but it is not impossible that a bit of creative accounting and juggling with numbers here and there could whisk this safely away and out of sight.

Looking through all this we can safely draw three conclusions.

1) September looks set to be a key month, as all the loose ends will need to be drawn together around that point.
2) None of the programmes put in place to date have worked as planned
3) The ESM will not have sufficient resources to meet all the forseeable calls on its funds.

The last of these issues has a simple and prgamatic solution. Unlike the ECB, which can create the money it uses for secondary market intervention, the ESM first needs to raise the funds it lends. Granting the ESM a banking licence which would give access to ECB funding and greatly ease the problem. The downside is that there is no public political will for this at present, and indeed Mario Draghi explicitly rejected the idea at last weeks press conference. Still, one thing we have all learnt in the two and a half years of this crisis is never say never.


What Can Be Done?

a) Shotgun Wedding
b) Full Banking Union
c) Common Fiscal Treasury
d) Central Bank able to act like the BoJ, the BoE and the US Federal Reserve
e) Less austerity and common finance to support the various economies while much needed structural reforms are undertaken.

This is just not doable say the critics. Well then, think about the alternatives for just 5 minutes and maybe you will change your minds.

No Easy Answers At This Point

Effectively I am suggesting turning the Euro Area into a second Japan. But Japan’s public debt path is not long term sustainable. There isn't any possibility Japan couldn’t exit the Yen, is there? I mean the country manifestly needs a much cheaper currency, yet despite issuing its own banknotes and being able to print somehow or other it doesn't seem able to achieve this (actually Joseph Stiglitz did suggest at one point the creation of a non convertable government issued second money to finance public spending, just as some have suggested for Greece). At present there are no capital controls in Japan, due to the presence of that famous "home bias" phenomenon whereby investors accept miserable rates of returns on their investments rather than sending their money abroad, but who knows, one day............

Basically we are faced with a complex set of problems which were never foreseen in economic theory. We don’t live in a perfect world. Angela merkel is wrong on austerity, but is right that in the longer run debt needs to be sustainable and our economies stable, even if that means accepting low, or even slightly negative, growth. Our intuitions are right, there are no free lunches. Stimulus can be good, depending on what else goes with it, but permanently living on borrowed time and running on “funny money” will inevitably end in tears.

As Paul Krugman put it recently, the Euro crisis has three layers - troubled banks, overlaid on troubled sovereign debt, overlaid on a deep problem of competitiveness created by runaway capital flows between 2000 and 2007 which lead to a huge problem of external indebtedness. The lastest summit decisions (when implemented) will help Spain address the first and second of these. But the big outsanding issue is still growth, a topic which was almost relegated to the sidelines given the extent of the other decisions. Economies in both Spain and Italy are sinking deeper and deeper into recession, and the 120 billion euro all Europe programme will hardly be sufficient to turn this situation around. Indeed in the case of all the rescued countries the same issues remains - where is the growth to come from? So while the summit outcome is certainly an example of yet another significant step forward, it is also a case of "oh so many rivers still left to cross".


And of course time is pressing, and it shows. The last summit statement concluded with the following words, "We task the Eurogroup to implement these decisions by 9 July 2012."

Having started this post with a piece the issue of press reporting of off the record remarks,  maybe it would be appropriate to finnish (no pun) with one. A representative of Finland's Finance Minister Jutta Urpilainen  (Matti Hirvola) has complained that the Minister never said  “Finland would consider leaving the eurozone rather than paying the debts of other countries in the currency bloc" in her interview (as reported by AFP). What seems to be at issue here are comments which are made on and off the record, and then how newspapers report the off the record part. After all, if you aren't prepared for debt sharing, the obvious question is what are you going to do if it comes (and it will). The natural response is "we are prepared for all scenarios", which is what they claim she said.

Curiously the report from the Finnish newsagency YLE which covers the story itself contains a good example of this kind of issue:
On Friday afternoon, the French news agency AFP cited an interview with Urpilainen published by the Finnish business paper Kauppalehti that morning. The wire service reported that “Finland would consider leaving the eurozone rather than paying the debts of other countries in the currency bloc, Finnish Finance Minister Jutta Urpilainen said".
In fact, Urpilainen said nothing of the kind in the interview. Rather she stressed that Finland is committed to euro membership and that “this is the message we must continue to convey”.
If you read the second paragraph again, the impression is given that it is YLE who are saying "nothing of this kind" was said in the interview, when actually it must be Matti Hirvola being quoted, since the YLE reporter was presumeably not present at the interview.
Since YLE themselves point to the Wall Street Journal's corrected version of the story, I think we can put the issue to rest with them:
Finland would rather leave the euro zone than pay down the debt of other countries in the currency bloc, Finnish Finance Minister Jutta Urpilainen said in a newspaper interview Friday.

"Finland is committed to being a member of the euro zone, and we think that the euro is useful for Finland," Urpilainen told financial daily Kauppalehti, adding though that "Finland will not hang itself to the euro at any cost and we are prepared for all scenarios."

"Collective responsibility for other countries' debt, economics and risks; this is not what we should be prepared for," she added.

Urpilainen's spokesman Matti Hirvola stressed to AFP that the minister's comments did not mean Finland was planning to exit the euro zone.

"All claims that Finland would leave the euro are simply false," he said.

In her interview with Kauppalehti, the finance minister meanwhile insisted that Finland, one of only a few EU countries to still enjoy a triple-A credit rating, would not agree to an integration model in which countries are collectively responsible for member states' debts and risks.
This post first appeared on my Roubini Global Economonitor Blog "Don't Shoot The Messenger".